World markets ended January on the front foot as all indices ended in the black. Sentiment was boosted by better US GDP numbers, assumptions that inflation has peaked, coupled with the expectations that Federal Reserve rate hikes are close to their peak and the hope that a recession in the world’s biggest economy will be avoided. In addition to this, continued optimism around a Chinese economic recovery post the relaxion of covid restrictions also guided markets higher.
US markets were firmer as good corporate earnings, for the fourth quarter 2022, as well as the previously alluded to inflation numbers, held sway. The S&P 500 ended the month higher by 6.2%, the Dow Jones better by just shy of 3% and the Nasdaq, aided by a strong recovery in tech stocks (Meta up 24% and Amazon up 23%, as examples), ending the month as the best performing US index, up by just under 11%.
Economic data for the month of December showed headline inflation data coming in at 6.5% vs. the November reading of 6.7%, while core inflation, which excludes the volatile food and energy components, also came in lower than the November readings, 5.7% vs the 6.1% reading of December. Furthermore, the fourth quarter GDP readings came in a 2.9%, marginally better than the market consensus, as opposed to the 3.2% reading for the third quarter of 2022. Consumer spending continues to weaken when compared to the previous period, albeit remaining positive. We anticipate that the resilience in US economic growth, mainly due to higher inflation, will slow in 2023, and we expect some further increase in rates.
European markets followed their US counterparts stronger, with the UK’s FTSE100 up by 4.3% for the month, with inflation numbers receding for the second month, printing a reading of 10.5% in December vs the previous November reading of 10.7%. Like the US, there was a cooling of the volatile contributors, food, and energy, which helped to mitigate price pressures. The S&P’s Global/CIPS Flash PMI for the UK sunk to a two-year low of 47.8 in January, as higher interest rates, coupled with lower consumer confidence, as the main reasons for the continued downturn in the UK’s business activity. Continued high underlying inflation, in addition to strong wage growth numbers, continue to point to further rate increases, in addition to the 350 basis points already implemented by the BoE.
German markets enjoyed a strong January, with the DAX closing up by almost 9%, while the CAC closed just up over 9% for the month. Retail sales in Germany fell, being weighed down by the continued high energy costs, together with higher inflation hitting consumers in their pockets, with sales falling by over 5% for the month. In France, inflation numbers for December came in higher at 7.0%, which was higher than the previous reading, as energy costs continue to rise, as the French government curtailed some of the measures aimed at curbing the impact of fuel price increases. Eurozone GDP numbers for the fourth quarter showed the economy growing by 0.1%, which beat consensus expectations of a 0.1% contraction for the period, but still lower than the 0.3% number printed for the third quarter of 2022. An increase in gas storage levels in the Eurozone contributed to lower energy costs, but expectation remains that further rate tightening to 3.5% will damage growth prospects in the region.
Asian markets enjoyed a bounce in January on the back of China’s continued relaxation of Covid lockdown measures. The Hang Seng ended the month up by over 10%, and the Shanghai Composite index closed the month higher by over 5%.
Benefitting from the relaxation of Covid policies, Chinese economic data saw a recovery in factory activity, with an expansion for the first time since September 2022. The official Chinese manufacturing PMI numbers came in at 50.1 in January vs a previous reading of 47.0 in December. The measure of business sentiment, non-manufacturing PMI, printed a reading of 54.4 in January vs a reading of 41.6 in December. A reading above 50 equals expansion, while one below 50 equals contraction.
Similarly, the Japanese market had an uptick in January with the Nikkei ending the month higher by 4.7%. Economic data indicated that inflation numbers accelerated at a faster than expected level to 4.0% for December, together with factory activity contracting for the third month in a row. Manufacturers optimism remains positive, however, with an improvement in supply conditions.